Please ensure Javascript is enabled for purposes of website accessibility

Virgin America Stock Flies Higher on Buyout

By Timothy Green - Apr 4, 2016 at 12:14PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Alaska Air is paying a hearty premium for the airline, creating the fifth largest airline in the country.

Image source: Virgin America.

What: Shares of Virgin America (VA) soared on Monday after the company announced that it was being acquired by Alaska Airlines (ALK -2.50%) for $2.6 billion. The stock jumped last week on a report that both Alaska Air and JetBlue Airways (JBLU 1.62%) were interested in buying the company. At 11:15 a.m. ET Monday, shares of Virgin America were up 41%, while those of Alaska Air and JetBlue were down 5.7% and 3.5%, respectively.

So what: Alaska Air is paying $57 per share for Virgin America, putting the total transaction value, including debt and capitalized aircraft leases, at about $4 billion. The deal price represents a substantial 47% premium over Virgin America's closing price on Friday.

Following the close of the deal, which is expected to occur no later than Jan. 1, 2017, Alaska Air will become the fifth largest U.S. airline, with more than $7 billion of annual revenue, 1,200 daily departures, and 280 aircraft. Alaska Air expects to achieve annual net synergies of $225 million once the two companies are fully integrated, while one-time integration costs are expected to be in a range of $300 million to $350 million. Alaska Air expects the transaction to be accretive to adjusted EPS in the first full year following the close of the deal.

Now what: The Wall Street Journal reported that bidding between Alaska Air and JetBlue was intense, pushing the eventual deal price higher. Both Alaska Air and Virgin America reported impressive profitability during 2015, with operating margins well above typical levels, driven in part by low fuel prices. At $2.6 billion, Alaska Air is only paying about 12.5 times adjusted earnings for Virgin America. However, the current level of profits may not be sustainable in the long run. JetBlue reportedly dropped its bid due to an escalating price, so Alaska Air is certainly not getting a bargain here.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Alaska Air Group, Inc. Stock Quote
Alaska Air Group, Inc.
$40.87 (-2.50%) $-1.05
JetBlue Airways Corporation Stock Quote
JetBlue Airways Corporation
$8.76 (1.62%) $0.14
Virgin America Inc. Stock Quote
Virgin America Inc.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.